Variable manufacturing overhead costs are a set of expenses that fluctuate as production levels change. Businesses calculate and use variable manufacturing overhead to estimate future costs and analyze past performance. If variable manufacturing costs are significantly different than expected, the business will perform variance analysis to identify the underlying cause.
Variable Manufacturing Overhead Costs
The three primary components of a product cost are direct materials, direct labor and manufacturing overhead. Manufacturing overhead is a catch-all account that includes all manufacturing costs a business incurs other than direct materials and direct labor. Within manufacturing overhead, some costs are fixed -- meaning, they don't tend to change as production increases -- and others are variable. Variable manufacturing overhead costs differ based on how much the company produces. Examples of variable manufacturing overhead include production equipment supplies, replacement machine parts, factory manager production bonuses, and electricity, water and gas bills for the manufacturing facility.
Standard Variable Manufacturing Overhead
Before production begins, a business will typically calculate a standard or estimated variable manufacturing overhead for the year. Accountants come up with this figure by analyzing historical data and determining how much variable overhead expense the company tends to incur per unit produced. For example, if variable overhead costs are typically $300 when the company produces 100 units, the standard variable overhead rate is $3 per unit. The accountant then multiplies the rate by expected production for the period to calculate estimated variable overhead expense. If the business plans to produce 200 units in the next period and the standard rate is $3 per unit, the estimated variable expense is $600.
Actual Variable Manufacturing Overhead
After the production period has ended, the business reviews costs and determines actual variable manufacturing overhead. Accountants do this by calculating how much was actually spent in variable manufacturing overhead during the period. When performing this calculation, accountants must be careful to calculate the amount of overhead used in production rather than the value of items purchased. For example, if the company purchased $500 worth of machine supplies but only used $400 of the supplies during the period, the accountant only includes $400 in the variable expense calculation.
Variable Manufacturing Overhead Variances
The difference between actual and standard overhead is referred to as a variance. If the variance is significant, management will investigate what caused the variance. Variances in variable manufacturing overhead are classified as either a spending variance or an efficiency variance. Unfavorable spending variances occur when the factory purchases items at a higher rate than expected. For example, if the cost of a kilowatt of electricity went up or if a purchaser had to pay more on machine supplies than usual, there could be a spending variance. Unfavorable efficiency variances occur when the factory uses more variable overhead per unit than expected. For example, if a machine needed more replacement supplies and parts than usual but didn't produce more inventory, there would be an efficiency variance.
- Photo Credit Wavebreakmedia Ltd/Wavebreak Media/Getty Images
Production Planning for Garment Manufacturing
Garment manufacturing is the mass production of clothing. Manufacturing garments entails a lot of planning and consciousness of schedule. The coordination of...
How to Calculate Overhead Cost Per Unit
Pricing is one of the most important factors in competition. Those companies with a better business model have an automatic advantage over...
How to Calculate Applied Overhead Costs
Overhead is a business's costs not related to direct inputs or administration. Applied overhead is the management's budgeted amount of overhead for...
How to Calculate Applied Overhead
Overhead is any costs which are not directly involved in the manufacturing of a product or part of the administrative expenses associated...
How to Calculate Variable Overhead
For most people, budgets aren't a fun subject. They require a great deal of planning and effort from various departments in an...
How to Calculate Variable Costs Per Unit
Businesses live or die based on sales volume and how well they control costs. However, before you can effectively manage expenses and...
How to Calculate Variable Cost
There are two main cost categories: variable and fixed. A variable cost is one that changes with your level of output. An...
How to Determine Material Handling Costs
Material handling costs are a crucial component of a manufacturing company's profit calculations. If these are overlooked when estimating production costs, the...
Examples of Variable Costs for a Business
Variable costs are business expenses that coincide directly with the level of production or product acquisition. In contrast, fixed costs remain constant...
Typical List of Overhead Expenses in a Construction Business
Construction companies must provide enough leeway in their contracts to cover overhead business expenses. These expenses are harder to calculate and pro-rate...
Techniques for Cost Control in Manufacturing Companies
Manufacturing costs can be divided into materials, labor, and overhead. Each of these areas offers opportunities for cost control. it is important...